'Rationally optimistic' companies have plans to hire, invest in 2007

Headlines about housing slumps, sinking subprime lenders, surges in Iraq and volatile energy prices have not dampened the spirits of Minnesota's biggest companies.

On the contrary, according to our annual Star Tribune 100 survey, Minnesota companies are downright buoyant about their business prospects for 2007. They plan to hire more workers and make capital improvements. They are not much concerned with climate change, and two out of three say Minnesota's gasoline tax should stay right where it is.

"Rational optimism, that would be the way I'd describe it," Christopher Puto, dean of the Opus School of Business at the University of St. Thomas, said of the results. "It does not look like they are cutting back on inputs [labor and capital] and there is no [sense] of panic."

The mail survey was conducted by Star Tribune researchers in February and March and was sent to 140 large, publicly held Minnesota-based companies. Sixty-seven responded, for a response rate of about 48 percent.

Among the highlights:

• 58 percent said they will increase head count in 2007. That's down from 65 percent a year ago. Only 5 percent said they will cut jobs in 2007.

• 43 percent said they plan to increase capital spending this year, while another 50 percent said that spending would remain steady. Those numbers are about the same as last year.

• Two out of every three responding companies expect merger-and-acquisition activity to increase in their industry in the coming year.

• About seven of every 10 companies said higher energy prices have affected their operations. Of those, 8 percent said energy prices have had "profound" effects on their business. But 28 percent of responding companies reported "little or no effect" on business.

• Nearly 80 percent said they believe oil prices will remain at about their current levels ($60 to $65 per barrel), although 20 percent expect higher prices a year from now.

The gas tax

Concerns about energy prices notwithstanding, responding companies are cool to the idea of raising Minnesota's gas tax to fund highways and transit. Sixty-five percent voted to keep the gas tax where it is. Meanwhile, 16 percent voted to raise it and 19 percent want it lowered.

Minnesota's gas tax is 20 cents per gallon and has not been raised since 1988. Bills in both the House and Senate would add 10 cents to the gas tax; Gov. Tim Pawlenty has vowed to veto such an increase.

Supporters of a gas-tax increase were more willing than opponents to comment.

"Minnesota's transportation infrastructure has been starved," General Mills commented." Investment is needed, and the gas tax hasn't been increased for decades."

Digital River favored an increase, "Assuming all of the new tax went for road maintenance."

Hiring and retaining workers and health care benefits remain the chief concerns of the businesses surveyed. Education, wage rates, state and federal taxes, increased regulatory enforcement and global competition also are considered first-tier concerns.

Second-priority concerns include energy costs, transportation, privacy regulations, terrorism, the war in Iraq, state and federal budgets and affordable housing.

Climate change ranked lowest on the priority list for most companies.

In a world fixated on quarter-to-quarter timetables, an issue such as climate change, which plays out over decades, is just "not what's flashing at them in their in-box at the moment," said Michael Swanson, senior economist at Wells Fargo & Co.

But that depends on what business you're in. Polaris Industries Inc., which makes snowmobiles and ATVs and has struggled with mild winters, ranked climate change a "very important" issue for its business.

Health care conundrum

Companies remain split about the future of employer-provided health care. Seven in 10 companies in this year's survey said they believe the current model, in which companies provide health care benefits as part of employee compensation, will remain viable. Meanwhile, 30 percent think the employer model won't survive. A year ago, 40 percent said the employer model was doomed.

General Mills summed up the health care issue this way: "It is an open question right now. The current system is coming apart at the seams."

More significant, Swanson said, is the fact that 72 percent of responding companies say they are considering "significant changes" to employee health care benefits.

"That's a pretty raw spot right there," Swanson said.

Sixteen of the 67 responding companies, or nearly one in every four, said they have already adopted so-called high-deductible health care plans that include a health savings account. These plans typically feature an annual deductible of several thousand dollars and then 100 percent coverage for expenses over that amount. A health savings account is then funded by the company and the employee, much like a 401(k) account, to cover expenses that fall under the deductible. Balances at year's end simply roll over and, theoretically, can keep growing.

Regulatory angst

The Sarbanes-Oxley Act of 2002, which introduced sweeping corporate reforms after the collapse of Enron and other Wall Street scandals, continues to generate corporate criticism. The complicated reforms have been phased in and the full effects of compliance began to hit smaller companies in recent years.

This year, 76 percent of responding companies said the reforms have "gone too far," up from 73 percent in 2006. Costs for complying with the act fall especially hard on smaller public companies, which make up the bulk of the Star Tribune 100.

"Accounting firms seem to have a blank check to audit/test/report," commented Synovis Life Technologies Inc., a small medical device maker. "[There's] no balance on [the] part of businesses."

Companies can expect some relief this year as some of the most burdensome rules are scheduled to be overhauled.

John J. Oslund • oslund@startribune.com Patrick Kennedy • pkennedy@startribune.com